"As to Bonaparte, he was well assured that nothing remained for him but to choose between that hazardous enterprise and his certain ruin."
-Memoirs of Napoleon Bonaparte, by Bourrienne

Friday, March 20, 2009

What is wrong with the Wall Street culture?

Goldman Sachs put on a little dog and pony show today to explain to the witless public that they had almost no net exposure to AIG and so the bail out of AIG was NOT a de facto bailout of Goldman.

This is how it works. Goldman and AIG had a special business relationship. Goldman bought junk mortgages from fraudulent, predatory lenders and other toxic assets and bundled them into securities to sell to some unsuspecting fool such as a municipal pension fund in Norway . To convince these utter marks that Goldman had some skin in the game, they held on to some of the mortgage exposure. See, if they are good enough for Goldman, they are good enough for your stupid Norwegian backwater. Except, they didn't really keep the exposure on the books. No way! They aren't stupid. They hedged this exposure with AIG. They bought insurance contracts with AIG, the so called credit default swaps (CDSs). So if the shit hits the fan in the mortgage market, Goldman will be OK even if the Norwegians get their cold white asses handed to them.

But then their business partner, AIG, started to look kind of sickly. Whoops. Looks like that hedge might not be reliable. How do we hedge our hedge? At this point there was no one else willing to write a big insurance contract against mortgage defaults since they were already defaulting. No one sells flood insurance during a flood. If AIG goes down, Goldman would as well. How would Goldman get out of this one? By shorting the bejesus out of AIG, that's how! They took out CDSs on AIG that would pay out if AIG went down. That's right. They bet that their business partner would fail so that if they did, on the whole, they would come out OK. So in the end, says Goldman, we couldn't care either way what happened to AIG, the fools getting foreclosed on or those dumb Norwegians. We took responsibility for our company and made sure that we would come out OK regardless what happened. So we are innocent of all these accusations of needing a stealth bailout.

What really amazes me is that they thought this would somehow convince people to leave them alone. See, we didn't need a bailout. We already bet that AIG would fail. In fact we bet that all of you would fail. We have no exposure to any of you. We are betting against Norway as we speak. Pretty sure they are going down. We should know since we are the ones that sold them all this garbage.

This culture of Wall Street is now about forming business relationships and then making sure you have no "exposure" to the fate of these partners. That is, business relationships are now like some disease that you are get "exposed to". Prudent business policy now is to actively bet against your business partner's very survival so that if they go down, you come out just fine. What kind of culture are we breeding on Wall Street. It is everyone for themselves. No one trusts anyone. No one is willing to form normal business relationships where you and your partner are truly in the same boat. Goldman's meeting today displayed this more clearly than I have seen before. The amazing thing is that didn't even consider that what they were admitting to was worse than what they were trying to defend their company against.